Medical marijuana spinoff firms look to cash in on new rules

Pot vending machine, software app among products on offer

Growth technician Mike Lottman moves through the marijuana plants in a medical marijuana centre in Denver on April 2, 2012. The federal government's move to bring in new rules for the medical marijuana industry is generating interest from U.S. companies. (Rick Wilking/Reuters)

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A range of spinoff companies, many of them located in the United States, are angling to cash in on the Canadian medical marijuana market as the federal government brings in new rules for the industry.

Producers of homegrown marijuana will be abolished under the new system and replaced with industrial facilities overseen by the RCMP and federal health inspectors.

Health Canada has said there’s no limit on the number of producers that will be certified under the new regime, and that the price of the drug will be determined by the market.

So far the department has received more than 180 applications from individuals or companies seeking to become certified producers. But Don Schultz, who runs a medical marijuana education firm called Greenline Academy, estimates the market could eventually sustain 1,000 “cultivators” from coast to coast.

Schultz’ firm is one of many companies that have grown up around the production and sale of medical marijuana in Canada — an industry that’s been growing steadily and is expected to be worth $1.3 billion in a decade.

More than 37,000 people in Canada currently use medical marijuana, up from less than 500 in 2002. That number is expected to reach 450,000 by 2024, according to Health Canada.

Greeenline is holding a two-day seminar in Toronto next weekend to train attendees on how to navigate the rigorous application process needed to become certified as a producer.

“You’ll have about an inch-thick piece of paperwork that needs to go in to Health Canada if you want to be accepted by the new program. There’s security to worry about, production practices, quality assurance, setting up the facility the proper way, all those things to do with the rules, regulations and bylaws of different cities and towns,” Schultz said. “There’s quite a bit of knowledge that a person has to know to put it all together.”

Nearly 200 people are expected to attend the event, he said, each paying more than $1,600 for a ticket.

Interest south of the border

Companies certified as producers will have to be run by a Canadian resident. But Schultz said he has seen “quite an influx” of interest from American firms looking to gain a foothold in the Canadian market either as investors, or by delivering products and services related to commercial marijuana production.

Meanwhile Canadian companies appear to be looking south to draw on the expertise of U.S. firms that cater to commercial producers in the 20 or so states where medical marijuana is legal.

The Conservative government is launching a national "free market" in medical marijuana that's expected to eventually supply 450,000 Canadians. (Pawel Dwulit/Canadian Press)

California-based Medbox announced this week that it will be setting up marijuana vending machines on Canadian soil. The company said in a news release it’s partnering with a company that has been licensed under the new Health Canada system, and that the machines will have security features that will act as a “medicine vault.”

However under the new regime, medical marijuana will have to be sent to customers via secure courier, suggesting the machines might not be used for direct sales to the public.

Michael Mayes, the CEO of Colorado-based “cannabis consulting and technology consulting firm” Quantum 9, said about half of his business now comes from north of the border.

“A lot of them are coming for architectural advice, as far as grow-room optimization, where the plants should be located, what media they should be growing in, what assets they should be using as lights,” Mayes said. “The demand is increasing incredibly.”

American firms catering to medical pot growers

The U.S. medical marijuana industry was already worth $1.7 billion in 2011 and could reach $9 billion by 2016, according to a study by financial analysis firm See Change Research.

Patrick McManamon is managing director at Cannassure, headquartered in Cleveland, which bills itself as "one of the leading providers of insurance in the marijuana industry."

A few months ago his company began receiving "a lot more requests" from clients, insurance agents and brokers north of the border.

"We've spoken to about 20 or 25 people from Canada that are putting things together and seeing what we can do to help them," he said.

A Seattle-based private investment firm called Privateer Holdings, which specializes in the legal marijuana industry, is also hoping to enter the Canadian market.

The company's first investment was Leafly.com, a website and app that helps users in the U.S. and Canada find licensed medical marijuana suppliers, and crowdsources information about the effects of various strains of the drug.

Brendan Kennedy, Privateer Holdings' CEO, said his company is "close to deploying capital" in a Canadian firm but it's too early to announce details.

"There's just a couple of things that we need to do from a legal and banking standpoint in order to move forward," he said.

Kennedy added that he believes the rules and regulations around the new marijuana regime in Canada are much clearer compared to other jurisdictions in the United States.

And he was impressed with "how mainstream" marijuana is in Canada generally.

"That's been one of the bigger surprises," he said.

Corrections

A previous version of this story said that Privateer Holdings was based in California. The company is in fact based in Seattle, Washington.

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